Judges Begin to Question “Sweetheart” Securities Regulatory Settlements


Some judges are starting to question lenient settlement deals proffered by Wall Street firms and their arguably captive regulator, the SEC, according to an August 19, 2010 article in the Wall Street Journal by David Weidner called “In Search Of Justice for Wall (Street).” Two U.S. District Court Judges, Jed S. Rakoff and Ellen Segal Huvelle, have rejected settlements on the ground that the penalties were too small to be fair to the investing public. Another federal judge, Emmet G. Sullivan, threatened to reject but ultimately accepted a settlement proposed by the SEC and Barclays PLC. Judge Sullivan reportedly had earlier called it a “sweetheart deal.”

Judge Huvelle, who rejected a settlement agreement proposed by the SEC and Citigroup, told the parties: “I look at this and say, ‘Why would I find this fair and reasonable?’ You expect the court to rubber-stamp, but we can’t.” “The judge, striking a frustrated tone, fired several questions at the SEC, among them why it pursued only two individuals in the case and why Citigroup shareholders should have to pay for the alleged sins of bank executives.” (See “Judge Won’t Approve Citi-SEC Pact,” by Kara Scannell, Wall Street Journal, August 17, 2010. The SEC charged Citi with misleading investors by deliberately understating its subprime exposure by $37 billion, and proposed a settlement of $75 million. The judge said she was provided no guideposts to determine whether that was a fair settlement.

In his August 18, 2010 article in the Wall Street Journal, “Citigroup’s Paltry Debt Penalty,” David Reilly points out that while the SEC charged and settled with two Citigroup executives, the SEC also made it clear that more executive were involved than the two who were asked to pay $100,000 and $80,000, respectively ? a relatively paltry sum for a Wall Street executive. He also pointed out that Goldman Sachs paid $550 million for a lesser offense than the $75 million being proposed for Citigroup.

The judges who have rejected proposed settlements have voiced concerns that the SEC should pursue “more serious sanctions against individual managers,” according to the article, citing Robert Heim, a former SEC assistant regional director. “Right now, it’s numbers negotiated between prosecutors and the accused. Judges are concerned the penalties are too small,” Mr. Heim was quoted as saying. Shareholders are twice victimized ? once by the wrongdoing and again by a trivial penalty.

In his “In Search of Justice'” article, Mr. Weidner asks readers to consider a group of notorious Wall Street offenders: Merrill Lynch’s Henry Blodget, Credit Suisse’s Frank Quattrone, Bear Stearns’s Ralph Cioffi and Matthew Tanin, Bank of America’s Theodore Siphol, the New York Stock Exchange’s Dick Grasso, Morgan Stanley’s Mary Meeker, and Citigroup’s Jack Grubman. “A few of them lost their jobs. Some were tried. But there wasn’t a conviction in the bunch. Some have even thrived.” People see that and think: that is not right and fair. They are angry about it, and judges are people too.

J. Boyd Page, senior partner at Page Perry, an Atlanta-based law firm, said: “I think these judges realize that it does no good to fine a corporation that will simply pass through a fine to customers or shareholders. The wrongdoers in these cases are executive officers, and the only way to change their behavior is to put the fear of God in them. Let them know that the penalty for financial fraud is the loss of their personal assets. Then you’ll see some change.”

Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys have extensive experience in representing investors in securities matters. For further information, please contact us.